Sometimes filing bankruptcy is a necessary step to keep from losing your home. For example, a Chapter 13 filing allows you to get caught up on past due mortgage payments without having to face foreclosure. Chapter 7 lets you wipe out unsecured debts, freeing up cash flow so there’s less financial pressure to keep up with your loan payments.
Once you come out of bankruptcy, you’ll have to begin the hard work of repairing the damage to your credit. This is crucial, particularly if you plan on refinancing your mortgage at some point to try lower your interest rate or reduce your payments. If you’ve got an FHA loan, there are a few things you need to keep in mind if refinancing is your long-term goal.
You Won’t Be Able to Refinance Right Away
The Federal Housing Administration imposes a mandatory waiting period before you can refinance after bankruptcy. If you filed a Chapter 7 case, you’ll have to wait two years from the date of the initial discharge to apply. With a Chapter 13 case, the waiting period is satisfied after one year but you have to be staying on track with your repayment agreement.
If you have a high balance FHA loan, you’ll be waiting a little longer. Generally, you’re considered to have a high balance loan if you borrow more than $417,000. If you filed bankruptcy with this kind of loan, you’ll have to wait seven years before refinancing is an option.
You’ll Have to Meet the Eligibility Guidelines
Refinancing an FHA is a little different than refinancing a conventional loan in terms of what lenders require but there are still some specific criteria you have to meet. For starters, you have to have re-established your credit since your bankruptcy filing. Generally, you’ll need a minimum credit score of at least 580 to qualify and you have to be current on your mortgage with no late payments.
You’ll also need to have at least 3.5 percent of the home’s value to put towards a down payment. If your credit score is on the lower end of the scale, you may be able to improve your chances of getting approved by bumping up your down payment to 10 percent.
You Can Fast-Track the Process with a Streamline Refinance
If you’re not interested in pulling any equity out of your home, the FHA Streamline Refinance program is worth a look. A streamline refinance is a good option if you’re underwater on the home, since there’s no appraisal required and unlike a cash-out refinance, you’re not required to show proof of income to qualify.
As far as the credit requirements go, the FHA doesn’t have a minimum score that’s required. You may still have to meet the bank’s requirements, however, and most lenders typically look for something in the 620 to 640 range at minimum. The most important caveat of a streamline refinance is that it must lower your monthly payment by at least five percent.
Benefits of a Streamline Refinance
Aside from not requiring an appraisal, a streamline refinance takes less time to complete than a standard cash-out refinance. That’s good news if you’re still trying to get your finances in order after a bankruptcy and you’re looking to trim your overhead costs as much as possible.
Another advantage of the streamline program is that it’s possible to roll the closing costs into the loan so you’re not having to come up with a lot of cash all at once. Closing costs typically run between 2 to 5 percent of the loan value so that could potentially save you a lot of money. The only catch is that if you choose this option, you’ll have to get the home appraised.
One final benefit to the streamline refinance program is that you may be able to have part of your original upfront mortgage insurance premium refunded. If you took out your original loan before June 1, 2009, you may also qualify for a reduction in your upfront and monthly mortgage insurance premiums.
Make Getting Your Credit in Shape a Priority
Bankruptcy by itself won’t bar you from getting an FHA refinance loan but you shouldn’t neglect trying to improve your credit. A higher score means a lower interest rate so the more you do to improve yours in the months after your bankruptcy filing, the more money you stand to save on your new mortgage loan.
There’s no trick to boosting your score. Paying your bills on time, not going crazy with applying for new credit and keeping your debt to a minimum are really all it takes to see positive progress. Following these simple rules can put you on the right track to getting your refinance approved at the lowest rate possible.